The US has similar payroll tax requirements to Australia. From withholding taxes on wages, to payment of payroll taxes assessed on wages paid, and lodgement of employee forms, there is a range of compliance requirements that your company must fulfill.

There are a wide variety of payroll tax considerations, including tax withholding and taxes payable on the amount of wages. These taxes are levied to fund social security, Medicare, unemployment and disability benefits, and other State and Local requirements.

Withholding Taxes

• Employers are responsibility for withholding taxes from wages and paying this to the Federal government.
• Some States also require withholding taxes to be withheld in relation to the income taxes on employee wages.
• Employers must typically make regular payroll tax deposits and file quarterly payroll tax returns with the IRS.
• State and Local tax agencies often have their own reporting and payment requirements.
• Withholding taxes go towards the individual employee’s income tax obligations.

Payroll Tax Requirements

Federal Insurance Contributions Act (FICA) Taxes

• Funds social security and Medicare.
• Social security tax rate is 6.2% for the employee plus 6.2% for the employer.
• Medicare tax rate is 1.45% for the employee plus 1.45% for the employer.
• Additional Medicare is payable at 0.9% for the employee when their wages exceed $200,000 in a year.

Federal Unemployment Tax Act (FUTA) Taxes

• Funds state workforce agencies and unemployment insurance.
• FUTA is payable by the employer and is calculated at 6% on the first $7,000 paid to each employee.
• Payment of state unemployment taxes can often be used as a tax credit to bring the FUTA tax rate down to as low as 0.6%.

State Payroll Taxes

• State Payroll Taxes may apply depending on the location of your business.
• The most common State tax is State Unemployment Tax (SUTA), which is payable by the employer.

Local Payroll Taxes

• Additional payroll taxes may be payable based on the zip code, county or municipality where your business is located.

Employee Forms

• At commencement of employment, employees fill out a Form W-4. This guides employers on how much income tax to withhold.
• At the end of each year, employers must provide employees with Form W-2, which reports the employee’s annual wages and tax withholdings.
• On commencing employment, employers are required to verify an employee’s eligibility to work in the US. This is typically done through the I-9 Form.

Other Payroll Considerations

• Workers Compensation Insurance
• State Disability Insurance
• Paid Leave
• Health Care Costs for Employees
• Retirement Plan Contributions 
• Reimbursements and Stipends

Penalties For Missed Or Late Payments

The IRS may charge a late fee for employment taxes that are not paid on time. This is called a “Failure to Deposit Penalty”.

Payroll tax penalties are:

• 1-5 days late: 2% of the overdue payment
• 6-15 days late: 5% of the overdue payment
• Over 15 days late: 10% of the overdue payment
• More than 10 days from first notice: 15% of overdue payment

Other Employee Benefits

Other Employee Benefits you may be required, or choose, to pay, can include:

Retirement Plans

One of the tax advantageous retirement savings plans is known as a 401(k). Under this plan you would pay a percentage of each paycheck into your employee’s retirement savings account instead of directly to them.

Health Insurance

Employers must offer affordable health insurance that provides minimum value of 95% to full time employees (working 30hrs or more a week) and their children (until they turn 26).

Stock and Stock Options

Stock and stock options can be offered as a form of equity compensation.

The US has a complex tax system, with multiple taxes, including income taxes, often being imposed on a State level as well as a Federal level. Some types of taxes also apply locally, meaning that even within the same State you can pay very different taxes to other parts of the State.

• The US Corporate tax system operates on a Federal, State and Local system. This means taxes and other compliance costs may be charged from all three levels.
• Filing requirements, lodgement deadlines, and available deductions or credits often differ between locations.
• Due to the complexity of Local variances, compliance with the Local tax laws requires specialised Local knowledge for the area or areas in which your business operates.
• To optimise your corporate tax strategy, it is recommended that you consult with experienced tax professionals who have a Local understanding of US taxes, as well as international taxes.
• Tax returns are typically based on a calendar year.

Choosing Your State

Since every State has different laws, it can be important to select the right State for your business operations. You will be required to register in every State that you operate in, however if you have no particular business requirement for which State or States you operate in, then it can be advantageous to select a State that has more well known and simple tax laws.

For instance, Delaware has no state income tax, a fairly straight forward tax system, and well-known corporate laws across the US.

Types of Taxes

Income Taxes (Federal And State)

• The Federal tax rate for companies is 21% 
• 44 States levy corporate income taxes. These taxes vary from 0% to 11.5%, with some states assessing taxes on a flat rate and others using tax brackets in the same manner that individual income taxes are assessed.
• 43 States levy state income taxes, 41 tax wage and salary income, New Hampshire exclusively taxes dividend and interest income and Washington only taxes capital gains income. Seven states don’t impose any individual income taxes. Some states use a flat income tax rate, while others have a graduated tax rate depending on the individual’s income.

Sales Taxes (State And Local)

• Sales taxes are similar to GST or VAT in certain parts of the world. However, as sales taxes are only imposed on a State level, the rates vary between 0% and 7.25% depending on the State.
• There are also various Local governments within 35 States that impose an additional sales or use tax, which ranges from 1% to 5%.

Property Taxes (State And Local)

• Local authorities such as cities, counties, and school boards, typically impose property taxes on the value of the property, including the land and the structure on the land.
• Each State imposes different parameters on property taxes.
• Property taxes can also be payable on purchase and/or sale of property.
• Most States have a “homestead” exemption which reduces or eliminates the cost of property tax on your primary residence, subject to a variety of qualifications or limits, which vary State to State, or even within States.

Payroll Taxes (Federal, State And Local)

• Federal payroll tax is paid by both the employer and the employee.
• Some States and Local authorities also require some form of payroll tax to be paid. The most common type is State Unemployment Insurance (SUTA tax), which is payable by the employer.

Franchise Of Privilege Tax (For Doing Business In A State)

• Some States require certain business organisations to pay a franchise tax, otherwise known as a privilege tax, for doing business in the State.
• This tax is typically calculated on the net worth of capital held by the entity.
• Some States use an economic and physical presence test to determine whether a business is taxed, while others have no written interpretation of the basis of their test for determining who is required to pay the franchise tax.

Gross Receipts Tax (State)

• Some States apply a gross receipts tax on a company’s gross sales, without consideration of deductions for expenses.
• Gross receipts tax applies to businesses, regardless of whether sales relate to business-to-business transactions or business-to-consumer transactions.

Business Licenses (State, Local, With Some Federal Regulations)

• Business licences or permits may be required on a Federal, State, or Local level.
• Business licenses can take some time to be processed, and they should be completed prior to commencing operations. The complexity of the application depends on your industry, as well as the locality managing the license.
• Licences and permits typically need to be renewed on a regular basis.

Due to the complexity of the wide variety of Local, State, and Federal taxes, it is important that you obtain qualified advice regarding your business. If your business expands into additional locations you will need to get updated advice regarding the new location in which you are operating.

Expanding to the US means you are entering a complex tax system. From international tax concerns, to different Local, State, and Federal requirements, there are many factors to consider. The type of legal structure you choose will impact your compliance and tax considerations obligations.

Type Of Entities

C Corporation (C Corp)

• Separate Legal Entity that works like an Australian private company does.
• Offers some asset protection due to legal structure.
• Taxed at the corporate level and when profits are distributed as dividends, these are taxed in the hands of shareholders.
• Has Directors, shareholders (stockholders) and a separate tax identity to the shareholders.
• Federal income tax rate is currently 21%. State income taxes may also apply.
• In some instances dividends may have a reduced withholding rate of 5% when paid to foreign shareholders.
• Allows for capital raising, new shareholders or selling the business completely by selling shareholdings to new investors.
• High compliance requirements including meetings, quorums, minutes, and other management formalities.

Limited Liability Company (LLC)

• This is a simplified form of a company. In operation it is similar to an Australian partnership where control is in the hands of the members and profits flow through to the owners rather than being taxed at the entity level.
• Provides similar protection, and more flexibility than a C Corp.
• LLCs are not managed by Directors. They are managed by the members or an appointed Manager.
• It is possible for an LLC to have a sole member.
• Members do not need to be US residents.
• Tax returns need to be filed if there are two or more members, however the profits are distributed to the members who pay tax on their share of the profits.
• Can elect to be taxed as a C Corporation instead of being taxed in the hands of the members.
• Can elect how profits are distributed to members. For instance, profits may be split equally between members, based on capital contributions, or in other agreed ways.
• If foreign tax is paid on the profits to an Australian member, they can claim the foreign tax paid as a tax credit on their own assessment of profit distribution received.

Branch (No New Entity)

• No separate legal entity, meaning Australian entity is directly responsible for tax and compliance requirements.
• Branch profits may be subject to US tax as well as Australian tax, depending how the branch is established in the US. In this instance the Australian company can typically claim the foreign tax paid as credits to reduce the impact of double taxation.
• As there is no additional entity there may be less compliance issues to consider with transferring profits from the US to Australia. 
• Whether you need to establish a US entity or not, will depend on the nature of the business you are operating.

Taxation Issues To Consider With Your Chosen Legal Structure

Both Australian and US tax laws need to be considered regardless of the legal structure used to establish the US business operations. International tax issues will also need to be considered where members, Directors or owners remain residents of Australia.

Australian Taxation

• If the US entity is controlled in Australia it may be treated as an Australian tax resident.
• The Australian parent company will need to consider how the fees paid between the US and the Australian entities are taxed in Australia.
• US generally imposes a 30% withholding tax on payments to foreign entities.

US Taxation

• The US may tax income earned from any business established in the US, regardless of whether the operating company is a US or Australian resident.
• Australian resident members or Directors may be subject to US taxes before considering Australian taxes on income generated from the US branch or entity.

Fees Between Entities

1. US transfer pricing rules require transactions between related parties to be at arm’s length. This means that the value of fees may be adjusted where it is not arm’s length.
2. Proper documentation is essential for consulting or management services between entities, including basis for fees charged. This can assist in ensuring that fees paid between the US and Australian entities are treated as required for tax purposes.
3. Fees must be ordinary and necessary business expenses in order to be tax deductible to the paying entity.

If you or any of your key employees will be moving to the US when expanding your business, they may have unique tax considerations.

With both Australia and the US taxing their residents on their worldwide income, and taxing non-residents on income that is sourced within the respective country, it is important to be aware of double taxation provisions that help ensure an individual isn’t taxed twice on the same income.

Tax Residency

It is important to determine which country an individual is a tax resident of, as this will impact how that individual is taxed in each country.

When an Australian resident moves to the US for work purposes they will typically become a US tax resident if they establish a home in the US and reside there on a “permanent” basis. Factors that will be considered in determining whether residency changes include whether family is brought overseas with them, if they buy or rent a home to live in, and if they disconnect with ties back in Australia. 

Conversely an individual who lives in the US on a short-term basis, staying in temporary accommodation, and leaving their family back home in Australia, is more likely to remain an Australian tax resident.

A US resident who moves to Australia will face a similar situation. However, the US is fairly unique in taxing citizens on their worldwide income, even if they change their country of residency for tax purposes.

Expatriate Taxation Rules

It is important that you familiarise yourself with both the Australian and US tax rules related to expatriates, so that your key employees who travel from one country to the other have the right information to manage expatriate taxation concerns.

Foreign Earned Income Exclusion

When certain conditions are met, individuals from the US may qualify for the foreign income exclusion. This applies for individuals who reside in a foreign country and earn foreign income. As US citizens are typically taxed on their worldwide income, regardless of their tax residency status, this allows eligible individuals to exclude certain income from their US federal income tax return.

Foreign Tax Credit

Both Australian and the US allow provision for foreign tax credits to be claimed in their resident tax return.

This ensures they are not taxed twice for the same income from both the source country and their country of residence.

Tax Equalisation Policies

Tax equalisation policies are policies that aim to neutralize the impact of an individual’s tax liability when they are working on a global assignment. The objective of these policies is to ensure that the tax burden on an individual is similar to what the individual would have faced if they had merely remained living in their home country.

Australian Help Debts

In the event that you move an Australian employee to the US on a permanent basis, they may become a US tax resident. Ordinarily this would mean that they only need to lodge an Australian tax return to declare any Australian sourced income.

However, if the individual has an outstanding HELP, TSL or VSL debt, they will need to declare their worldwide income. While a foreign resident is not liable for Australian taxes on foreign sourced income, they are still liable for HELP debt repayments based on the value of their worldwide income.

Individual Tax Obligations In The US

As the employer you should be prepared to provide guidance to any key employees that you relocate from Australia to the US. This helps ensure that they aren’t caught unaware of their obligations and tax requirements while residing in the US.

Familiarise your employees with US filing requirements, which are not only different, but can be significantly more complex than Australian requirements.

• The US tax return is based on the calendar year and the filing deadline is mid-April.
• In the US, Individual tax brackets vary from 10% to 37%. The US does have a tax withholding system, that is similar to Australia, to help individuals manage their tax obligations.
• Unlike Australia, where each individual must always file their own return, individuals in the US can file as a single person or jointly as a married couple, or separately as a married couple.
• The US requires individuals to lodge a Federal Tax Return. However, depending on the State in which the individual resides, they may need to file a State income tax return as well.
• Non-residents who receive US income are also required to file a tax return. This means that any employee who is only in the US on a temporary basis will need to file a US return as a non-resident.
• Local Income Taxes may also need to be considered.

Employee Benefits

The US has similar benefits and options for employees as Australia does, however there are some key differences that an individual employee should be aware of so that they can make appropriate plans and decisions for their individual care.

Retirement Plans

US employers are not obligated to contribute towards retirement in the way that Australian employers are required to pay the Superannuation Guarantee. Most employers voluntarily provide retirement benefits through a 401(k) plan (similar to Superannuation).

Health Insurance

While the US has a federal health medical system, Medicaid, to provide free or low-cost health coverage, this is typically limited to low income and disadvantaged individuals. Without a universal healthcare system it is important to consider health insurance, which is commonly provided as an employee benefit.